Note: The views and opinions expressed in this newsletter are those of the authors and do not necessarily reflect the official policy or position of Newday Impact. Any content provided by our authors is of their opinion and is not intended to malign any religion, ethnic group, club, organization, company, individual, or anyone or anything.
Investors should seek financial advice regarding the appropriateness of investing in any security or investment strategy discussed or recommended in this report and should understand that statements regarding future prospects may not be realized. Investing in securities involves risks, and there is always the potential of losing money when you invest in securities. Past performance does not guarantee future performance.
CEO COMMENTARY
The best education that money can’t buy
Pride in one’s surname, respect for a parent’s life experience, and the importance of family legacy remain core values of our society. Yet these qualities seem to be diminishing as personal relationships are maintained increasingly by social media. While these tools are helpful for communicating and coordinating the daily logistics of life, they cannot replace the hug, handshake, and other meaningful, direct connections we develop with loved ones over time.
The challenges associated with ensuring that your financial legacy lives on in perpetuity are more complex than they’ve ever been. The years ahead are certain to be filled with financial and cultural pitfalls we’ve not witnessed in our lifetimes. Yet this new world also can present opportunities for those who embrace and act on a set of values largely more responsible than what has been displayed in recent decades.
The future is likely to reward individuals who possess a broad combination of abilities and personal traits: educational achievement, financial acumen, integrity and empathy, social and cultural awareness, relationship management skills. Newday believes that heirs who have these qualities will be positioned to be the appropriate guardians of your legacy and its objectives.
A Lesson One Never Forgets
As a young man, I learned quickly the impact that strength of character and ethical behavior have on successive generations. My family believed that responsibility for teaching life’s lessons did not begin and end with one’s immediate parents, but extended to the entire family. When I sought summertime work as a teen in my hometown, I often met local business owners. They were professionals who had a relationship with my grandfather who ran a commercial bank. After learning my name, these businessmen always greeted me with a strong handshake and expressed their gratitude for the relationship they had with my grandfather. I still remember the swelling of pride I felt for being a part of a family that had made such an impression on the community through its professional and personal conduct. Our family name and the trust it conveyed were inextricably tied to how my grandfather did business.
I was the beneficiary of his and my other grandparents’ strong moral character – a quality that my parents also displayed. The example they set was an education one can’t learn in school. Their influence was lasting, as today I try to demonstrate to my own children that social responsibility starts at home. Volunteering has become a hallmark of our family as we engage and influence our next generation.
The Importance of Wealth Transference
By including your children and/or grandchildren in volunteer activities, you teach civic duty. Many philanthropic planners also encourage parents to volunteer side-by-side with their children and consider matching children’s hours of volunteer service with financial contributions to a cause of their choice. As children grow into teens and then young adults, you can extend these discussions to include investment planning decisions and the reasons for making them. By your own example, you will be teaching your children what it means to be financially responsible.
According to a variety of financial and demographic experts, the next 50 years will bring about the largest transfer of wealth in our nation’s history – some estimates exceed 40 trillion dollars. The complexities surrounding this transfer are extreme, and will affect intergenerational financial planning, tax liability, investment management, and charitable legacies. Without appropriate education and training in these areas, however, younger beneficiaries may be at risk of making uninformed and potentially poor decisions about their financial futures.
There is no standard text for teaching children how to deal with estates that one day will be theirs to direct. Furthermore, although one hopes one’s heirs will be unified in their decisions regarding estate management, the complexities arising from wealth transfer can extend well beyond the tangible. Intangibles may include trust and mutual respect, but underlying envy and resentment between siblings, spouses, and other beneficiaries also can percolate up and unwittingly disrupt the management of an estate.
The good news, however, is that there is growing consensus in families that financial planning to protect assets and reduce taxes should be a common goal. Also, more investors are recognizing that leaving a legacy for one’s beneficiaries that will last through multiple generations can best be achieved under the guidance of impartial professionals.
Fulfilling the Promise to our Youth
At Newday Impact, we work closely with individuals and their families on wealth transference issues ranging from stewardship and succession to long-range investment planning and investment management. Our objective is to assist you with your family’s education by providing the services and tools you need to ensure a promising financial future for your beneficiaries.
While instilling family pride and core values begins at home, ensuring that your legacy is properly cared for requires the assistance of unbiased advisors. Newday can arrange a personal consultation to discuss intergenerational wealth planning with one of our investment specialists to put in place a comprehensive investment strategy that will ensure your family legacy is preserved for successive generations.
IMPACT COMMENTARY
What a year it’s been—but ESG is here to stay!
If 2021 was the year that made ESG a mainstream phenomenon, 2022 was the year that convinced most that ESG was here to stay. Notwithstanding the controversies, setbacks, and political theatre that ensued this past year, regulators, investors, stakeholders, and the majority of public companies expressed their support for ESG initiatives and policies. They expect it to be an integral part of their business models in the future.
The adoption of ESG has been fueled by client demand. Most companies view it as a material risk and opportunity, and institutional investors consider it a permanent part of the investment landscape. As evidenced by a global study commissioned by the Capital Group, 61% believe ESG is something other than a fad that will go out of fashion. Morningstar recently surveyed over 550 corporate social responsibility and sustainability professionals to find that over 90% of companies either have or are developing a formal ESG strategy. In fact, Deloitte also did a survey showing that over the next year, 99% of public companies expect to invest in ESG reporting and technology tools. The Big Four accounting firms foresaw this trend when they announced nearly two years ago their billions of dollars in investments to develop their ESG expertise in reporting, audit quality, sustainability, and technology to keep up with growing demand. Well, here it is!
While negative ESG rhetoric seemed to reverberate throughout the year, sustainable fund inflows still held up better than the broader market, which experienced $198bn in Q3 net outflows. Morningstar data showed that sustainable funds globally, led by Europe, still attracted $147.6 billion (US) of net new money over the first three quarters of the year, a $22.5bn increase in net new money, albeit a 72% YOY decline.
It is worth noting, though, to combat greenwashing, we saw the SEC crack down on those with misleading ESG claims this year by demanding investment managers adhere to the standards they use to classify their ESG-labeled funds or suffer the financial and reputational penalties associated with it. As a result, total AUM took a hit due to certain US assets no longer being considered ESG funds. Those more demanding fund disclosures caused multiple money managers to report lower AUM to avoid greenwashing allegations. The US SIF: The Forum for Sustainable and Responsible Investment said that $17.1 trillion of US asset managers and institutions called ESG in 2020 is now $8.4 trillion this year. Additionally, an overall market value decline, along with a higher concentration of technology holdings and a somewhat non-existent exposure to energy stocks in most ESG funds, were also contributors to the decrease in AUM. In spite of this, the S&P500 ESG index still managed to slightly beat the broader S&P500 Index for the year.
Regulatory concerns over greenwashing, the transition into clean energy, geopolitical issues, and the “anti-woke” backlash from GOP politicians this year did not change the overall sentiment towards ESG as it is now amongst the Top 5 concerns with investors. According to PwC’s Asset and Wealth Management Revolution 2022 report, ESG-focused institutional investments are forecasted to soar 84% to US$33.9 trillion by 2026 or 21.5% of assets under management, with US ESG-focused AUM more than doubling from US$4.5 trillion in 2021 to $10.5 trillion in 2026. In Europe, where ESG investments rose by 172% in 2021 alone, AUM is projected to increase by 53% to US$19.6 trillion, and Asia-Pacific is expected to more than triple, reaching US$3.3 trillion in 2026.
With mandatory regulations and industry standards expected to finally come to fruition in the US this year relating to climate-related disclosures to catch up to our European counterparts, the politicization of ESG and subsequent legal challenges will likely heat up. But regardless of the anticipated hurdles, rampant misinformation spread, and misguided attacks towards ESG, most stakeholders fully embrace it, and we at Newday believe it is here to stay!
GLOBAL EQUITY COMMENTARY
Newday Impact 2023 Outlook
Written by: Newday Investment Team
Looking back at 2022
Financial markets often bring the unexpected. In December 2021, the stock market was at record highs and the Federal Reserve was just beginning its hiking cycle. Most were sanguine about the outlook. Over the last year we’ve seen an aggressive sequence of rate hikes by central banks, major geopolitical and energy crises in Europe, a prolonged economic shutdown in China, and a political backlash against many ESG investment strategies. Stocks fell into a bear market and Treasury yields rose to levels not seen since before the global financial crisis. Despite all those factors, the current inflation rate of 7% is close to that of one year ago, the price of crude oil is up only marginally over that timeframe, and ESG investing continues to grow.
Predicting markets is never an easy task and what look like clear trends in hindsight, are never obvious amidst the day-to-day volatility of asset prices. Successful investors need a systematic approach to filter out the incessant noise and make sound decisions that will consistently generate alpha, compounding excess returns over time. We believe this applies to generating both ESG and financial impact. Over the course of 2022 we worked hard implementing our investment process to choose stocks that we believe will deliver superior risk-adjusted financial returns and contribute positively across a range of ESG themes.
We believe The Kroger Co. (KR) and Ball Corp. (BALL) are two stocks that could outperform in a more defensive environment as the global economy slows. Likewise, these companies are also standouts from an ESG standpoint. Kroger has very impressive corporate DEI policies and has also committed significant funding to charitable giving initiatives, including food security. Ball’s focus on recyclable aluminum packaging is a more ocean-friendly alternative to plastics and the company also sponsors ocean clean-up work.
Our thoughts going forward
Looking into 2023, we see the potential for a more favorable environment for markets in the first half of the year, barring any unexpected geopolitical events. We continue to believe the primary driver is likely to be expectations around inflation and interest rates. The Treasury yield curve indicates a strong likelihood of an impending recession[1] although key components of inflation are also slowing. Some recent data has shown that US rent prices are starting to fall on a month-over-month basis.[2] Shelter costs account for almost one third of the consumer price index. Supply chain challenges and shortages of many crucial components have abated. Moreover, on a year-over-year basis, oil and gasoline price comparisons may become significantly easier starting in January and throughout the first half of next year as we lap the spike in energy prices that occurred following the outbreak of war in Ukraine. Even if wage growth remains relatively robust, overall inflation could continue to move gradually lower, taking pressure off of central banks. This may create a scenario where there is less downside for markets and more upside for global growth expectations.
We think that key risks to monitor next year are geopolitical events in Europe, COVID trends globally as well as specifically in China, the potential for supply chain problems to re-emerge, as well as the outlook for monetary policy – all of which could exacerbate the potential for a global recession. Higher grain and food prices could also create material instability risks in certain countries that rely on imports. If the winter months are colder than expected in Europe, it could lead to rationing and shutdowns in some parts of the economy as well as ripple effects in other parts of the world. An acceleration of COVID cases and the potential for new variants could create risks, particularly in countries with lower vaccination rates. The recent possibility of a rail strike in the US as well as COVID-related factory shutdowns in China are reminders of threats to the global supply chain. We believe 2023 presents less obvious political risks than 2022, with the most noteworthy general election taking place in Spain, but not until the end of the year. Importantly, if inflation does not continue on a downward trajectory, this may be a negative catalyst for markets. We think that markets could potentially face more volatility in mid-2023 after the easier oil and inflation comps have been lapped, particularly if central banks have paused rate increases. If inflation slows down but then re-accelerates as it did in the early 1980s, this could be a renewed headwind for risks assets.
Adjustments for the new year
We began gradually taking up beta in our portfolios in November with a focus on adding some cyclical exposure that may perform well if rates and oil continue to rise along with value stocks. We expect to continue to gradually raise portfolio beta given our strategies have been defensively positioned. Like many of our peers, our portfolios are structurally short traditional energy given our ESG mandates. We have been working to creatively address this challenge using a basket of stocks that are positively correlated to energy equities but that are in other sectors, look attractive using our ESG and fundamental analysis frameworks, and do not contribute to GHG emissions. This will be important in the event that oil prices move back up again next year and the energy sector continues to trend positively. While financial markets can be unpredictable, we believe that our systematic, quantamental investment process has enabled us to construct portfolios that will both perform well through market cycles and make a positive impact across key UN sustainable development goals.
Footnotes:
Disclosure: This commentary is provided for information purposes only and is not an offer or solicitation of an offer to buy or sell any product or service. Unless otherwise stated, all information and opinion contained in this publication were produced by Newday Funds, Inc. (“Newday Impact”) and other sources believed by Newday Impact to be accurate and reliable. Due to rapidly changing market conditions and the complexity of investment decisions, supplemental information and other sources may be required to make informed investment decisions based on your individual investment objectives and suitability specifications.
Investing in securities involves risks, and there is always the potential of losing money when you invest in securities. Past performance does not guarantee future performance.
Newday Funds, Inc. is a subsidiary of Newday Financial Technologies, Inc. and is an SEC registered investment adviser.
Newday Financial Technologies, Inc. | www.newdayimpact.com
COUNTRY GOVERNANCE RESEARCH COMMENTARY
Russia’s full-scale invasion of Ukraine nears one-year anniversary
Despite numerous setbacks, Vladimir Putin has shown no indication that he intends to back-off his country’s assault on Ukraine. The rapid Ukrainian counteroffensives that characterized much of the fall have slowed, and the heaviest fighting has been concentrated around relatively minor terrain in Ukraine’s north-east. In particular, the small town of Bakhmut has become a focal point for fierce clashes that observers have likened to World War I trench warfare. The fighting on the Russian side has been led by the Wagner Group, a shadowy paramilitary organization founded by Putin ally, Yevgeny Prigozhin, who has recruited Russian prisoners with promises of pardons in exchange for military service. The convicts have reportedly been used in brutal waves of attacks against Ukrainian defensive positions leading to incredibly high casualties. Away from the front-line battles, Ukraine continues to employ Western provided precision artillery to strike targets deep inside Russian occupied territory. The most dramatic of those strikes occurred on New Year’s Day at vocational school housing Russian conscripts in Makiivka, in the eastern Donetsk region. Ukrainian officials claimed as many as 400 troops were killed. Russia only acknowledged 89 fatalities, which would still mark it as the deadliest single attack so far in the war.
Implications: In a sign of continued Western support, new weapons packages have recently been promised by the United States and others. Most importantly they will now include armaments that had previously been considered off-limits, such as Patriot air defense systems and armored fighting vehicles, which will be useful for future counter-offensives.
Netanyahu to lead right-wing Israeli government
Benjamin Netanyahu has been sworn in for his sixth term as prime minister after coming to an agreement to form Israel’s most right-wing government in its history. His coalition government, made up of Jewish ultranationalist and religious parties, has promised to pursue a number of controversial policies. The new Justice Minister, Yariv Levin, recently put forward a plan to overhaul the country’s judicial system including allowing the Knesset to overturn some Supreme Court rulings. Itamar Ben-Gvir, a politician convicted of inciting racism and who Netanyahu had previously said was too extreme to serve in his cabinet, has been named to a newly created post of national security minister with expanded powers over the police. As one of his first acts as a cabinet minister, he visited the Temple Mount a sensitive Jerusalem holy site revered by both Jews and Muslims. Past visits by Israeli politicians have sparked Palestinian backlash because they see the moves as disrupting the status quo that has been maintained at the site. On the economy the incoming finance minister, Bezalel Smotrich, has said that his religious beliefs would guide economic policy though he later clarified that the government would follow free market principles. There are also concerns Netanyahu and his allies could try and stymie his on-going corruption trial.
Implications: Netanyahu has tried to allay critics by emphasizing that he would be the final decider on policy matters notwithstanding the preferences of his cabinet members. Extremist policies pursued by the new government will risk complicating relations with the United States, Israel’s most important international partner.
Lula sworn-in for his third term as Brazil’s president
On January 1st, Luiz Inácio Lula da Silva was sworn-in as Brazil’s next president after narrowly defeating the right-wing incumbent Jair Bolsonaro in October’s run-off election. Lula’s return to the presidency was a stunning comeback after having been in prison for bribery only three years ago. He had been caught up in the sprawling Car Wash corruption probe that had ensnared numerous members of his Worker’s Party. Voters, and in particular his base among Brazil’s poor, looked past those issues and focused on his pledges to increase the minimum wage and spend more on social programs. Following the election, his allies in Congress suspended for one year the government’s spending cap allowing his government to spend an extra $28 billion on enhanced welfare payments. Lula also promised to give the government a central role in the economy, and following through on this pledge as one of his first acts he reversed several planned privatizations. He has also said that he would work to reduce the deforestation of the Amazon that had accelerated under his predecessor.
Implications: Combating growing poverty that has left Brazil with one of the highest levels of income inequality in the world is an urgent task. However, unlike Lula’s previous two terms in the 2000s, which coincided with a commodity boom, the Brazilian economy is now facing headwinds with low growth forecast for the next two years, and there are concerns about the longer-term impacts of using more debt to fund increased social welfare spending.